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Mindray Medical Remains Neutral

On Oct 8, we reiterated our Neutral recommendation on Mindray Medical International Limited (MR). Although the medical device company’s domestic sales remain robust, it is currently facing a difficult environment in developed international markets.

Why the Retention?

On Aug 5, Mindray posted a 17.8% rise in second-quarter 2013 adjusted earnings per share to $0.53 from $0.45 a year ago and met the Zacks Consensus Estimate. Net revenues grew 14.7% to $307.2 million but missed the Zacks Consensus Estimate of $319 million.

The company’s earnings have beaten the Zacks Consensus Estimate in 2 out of the last 4 quarters, while meeting the same in the last reported quarter, thus maintaining an average surprise of 5.42%. Following the earnings release, the Zacks Consensus Estimate for 2013 earnings inched up 1.5% to $2.01 and then 1.0% to $2.03 per share. However, the estimate for 2014 earnings declined 1.8% to $2.20 and then 0.9% to $2.18 over the same period.

Furthermore, the acquisition of ZONARE in July has led management to raise its year-over-year rise in revenues guidance to at least 18% from 17%. However, MR reiterated adjusted net earnings guidance, anticipating at least 15% rise over 2012.

Mindray is a bellwether in the Chinese medical devices industry. The company has a large domestic sales infrastructure, which gives it better access to medium-sized county hospitals. In China, it beats other multinationals on price and defeats local players, who have cheaper products, on brand recognition.

In western markets, MR targets mid-market and price-sensitive customers. Although it has entered the premium segment globally, its competitive advantage is still unclear. Uncertainties in healthcare reforms in the U.S. have reduced demand for Mindray’s products. Moreover, competition is fierce and threatens price erosion over time.